LIABILITIES

LIABILITY
A liability is a

a.present obligation of the entity

b.arising from past events
c.the settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits.
LIABILITY
Definition explained:

A.Obligation
a duty or responsibility to act or perform in a certain way
obligations may be legally enforceable or constructive
a.legally enforceable- binding contract, statutory requirement
b.constructive- normal business practice, custom and a desire to maintain good
business relations or act in an equitable manner
An obligation always involves another party to whom the obligation is owed. It is not
necessary, however, to know the identity of the party to whom the obligation is owed—
indeed the obligation maybe to the public at large.
LIABILITY
Definition explained:

B.Past event
The past event that leads to a legal or constructive obligation is known as obligating event.
C.Outflow of Economic Benefits
The settlement of an obligation usually involves the entity giving up resources embodying
economic benefits in order to satisfy the claim of the other party
payment of cash;
transfer of other assets;
provision of services;
replacement of that obligation with another obligation;
conversion of the obligation to equity; or
waiver (creditor waiving or forfeiting its rights)
*declaration of stock dividend shall not give rise to a liability
LIABILITY
Classification and Presentation:

An entity shall present current and non-current liabilities, as separate classifications except
when a presentation based on liquidity provides information that is reliable and more
relevant.

Whichever method of presentation is adopted, an entity shall disclose the amount of liability
to be settled
(a) no more than twelve months after the reporting period, and
(b) more than twelve months after the reporting period.
LIABILITY
Classification and Presentation:

Current Liabilities:
(a) entity expects to settle the liability in its normal operating cycle;
ü in classifying liabilities arising from the operations of the entity (trade payables and
some accruals for employee and other operating costs), disregard the 12-month rule
ü if the operating cycle is not clearly distinguishable, it is assumed to be twelve months

(b) entity holds the liability primarily for the purpose of trading;

(c) the liability is due to be settled within twelve months after the reporting period; or

(d) entity does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting period
 LIABILITY

DEC 31, 2020 DEC 31, 2021

TOTAL LIABILITIES
1,000,000

Current or Noncurrent?
LIABILITY

CURRENT LIABILITY

DEC 31, 2020 DEC 31, 2021

TOTAL LIABILITIES
1,000,000
LIABILITY

NON-CURRENT
LIABILITY

DEC 31, 2020 DEC 31, 2021 JUN 30, 2022

TOTAL LIABILITIES Due date
1,000,000
LIABILITY

CURRENT LIABILITY
(70%) NON-CURRENT
LIABILITY (30%)

DEC 31, 2020

TOTAL LIABILITIES JUL 1, 2021 DEC 31, 2021 JUN 30, 2022
1,000,000 Due date

CL= 700,000
NCL=300,000
LIABILITY

I CANNOT DEFER PAYMENT

CURRENT
LIABILITY

DEC 31, 2020 DEC 31, 2021 JUL 1, 2022

JUL 1, 2021
TOTAL LIABILITIES new due dute
due date
1,000,000

CL= 1,000,000
NCL=0
LIABILITY
BUT I CAN POSTPONE PAYMENT FOR
ANOTHER 12 MONTHS WITHOUT
ANY CONDITION.

CURRENT
LIABILITY

DEC 31, 2020 DEC 31, 2021 JUL 1, 2022

JUL 1, 2021
TOTAL LIABILITIES new due dute
due date
1,000,000

CL= 0
NCL=1,000,000
LIABILITY
BUT I CAN POSTPONE PAYMENT FOR
ANOTHER 12 MONTHS
CONDITIONAL

CURRENT
LIABILITY

DEC 31, 2020 DEC 31, 2021 JUL 1, 2022

JUL 1, 2021
TOTAL LIABILITIES new due dute
due date
1,000,000

CL= 1,000,000
NCL=0
LIABILITY
BUT I CAN POSTPONE PAYMENT FOR
ANOTHER 1 MONTH
WITHOUT CONDITION

CURRENT
LIABILITY

AUG 1, 2021
DEC 31, 2020 new due dute DEC 31, 2021
JUL 1, 2021
TOTAL LIABILITIES due date
1,000,000

CL= 1,000,000
NCL=0
LIABILITY
In relation to (c) and (d):
ü liabilities with original term longer than 12 months but due in twelve months after the balance
sheet date are current liabilities
ü refinanced or rescheduled payments
if liabilities become due in the next twelve months according to its term or because of a
breach on the loan covenant, the classification is
CURRENT
if the refinancing (rescheduling) agreement is completed after the reporting period but
before the authorization for issuance of the FS
NON-CURRENT
if an entity expects, and has the discretion, to refinance or roll over an obligation for at
least twelve months after the re porting period
if the agreement to refinance (reschedule the payment of) the liability is completed on
or before the end of the reporting period
LIABILITY

NON-CURRENT
LIABILITY

DEC 31, 2020 DEC 31, 2021 JUN 30, 2022

TOTAL LIABILITIES Due date
1,000,000=NCL
LIABILITY

CURRENT LIABILITY

DEC 31, 2020 DEC 31, 2021 JUN 30, 2022

Due date
TOTAL LIABILITIES
1,000,000=CL
LIABILITY

CURRENT
LIABILITY

DEC 31, 2020 DEC 31, 2021

JUL 1, 2021
TOTAL LIABILITIES Original due date May 1, 2022
1,000,000

CL=1,000,000
NCL=0
LIABILITY
SURE

Can I pay on
May 1, 2022?

CURRENT
LIABILITY

DEC 31, 2020 DEC 31, 2021

JUL 1, 2021
TOTAL LIABILITIES Original due date May 1, 2022
1,000,000 new due date

CL= 0
NCL=1,000,000
LIABILITY
SURE

Can I pay on
Nov 1, 2021?

CURRENT
LIABILITY

DEC 31, 2020 DEC 31, 2021

JUL 1, 2021
TOTAL LIABILITIES Original due date Nov 1 1, 2022
1,000,000 New due date

CL= 1,000,000
NCL=0
LIABILITY
SURE

Can I pay on
May 1, 2022?

CURRENT
LIABILITY

DEC 31, 2020 DEC 31, 2021

JUL 1, 2021
TOTAL LIABILITIES Original due date May 1, 2022
1,000,000 new due date

CL= 1,000,000
NCL=0
Specific Liabilities

• Premiums, Warranty, Accrued Liabilities, Deferred

Revenue

Accrued expense= LIABILITY (Dr. Exp, Cr. Liab)

Deferred revenue=LIABILITY (Dr. Cash, Cr.
Liab/Unearned Revenue)
Specific Liabilities
• Premiums
-articles of value such as toys, dishes, silverware, and other goods and in some cases cash
payments, given to customer as a result of past sales or sales promotion

-premiums are often offered to stimulate sales

-gives rise to a liability, when merchandise is sold, for the distribution of premiums
 Specific Liabilities

• Premiums

PREMIUM PREMIUM PREMIUM

EXPENSE LIABILITY (ASSET)
-computed on the basis of -premium expense- redeemed -(purchased premium -distributed
expected premiums to be portion premiums) x cost
redeeemed multiplied by the cost
of the premium
-premium expense- redeemed portion 500 tshirts at P100 each=Php 50,000
Premium expense 40,000 =40,000- 32,000
Estimated Premium Liability 40,000 = 8,000
Premiums (tshirts) 50,000
Estimated Premium Liability 32,000
Cash/AP 50,000
Premium (tshirt) 32, 000
Specific Liabilities
• Premiums

Univ Co. includes one coupon in each bag of dog food it sells. In return for eight coupons,
customers receive a leash. The leashes cost Univ P3.00 each. Univ estimates that 40
percent of the coupons will be redeemed. Data for 2019 and 2020 are as follows:
2019 2020
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

The premium expense for 2019/2020 is _______

 Specific Liabilities
• Premiums
Univ Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers
receive a leash. The leashes cost Univ P3.00 each. Univ estimates that 40 percent of the coupons will be
redeemed. Data for 2019 and 2020 are as follows:
2019 2020
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

2019 2020
Number of coupons issued 500,000 600,000
Etimated coupons to be redeemed (40%) 200,000 240,000
Espected number of leash to be redemed ( 8 coupons: 1 25,000 30,000
leash)
Premium Expense (each leash cost P3) P75,000 P90,000
Specific Liabilities
• Premiums
Univ Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers
receive a leash. The leashes cost Univ P3.00 each. Univ estimates that 40 percent of the coupons will be
redeemed. Data for 2019 and 2020 are as follows:
2019 2020
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

2019 2019
Premiums (Leash) 54,000 Est.Premium Liability (120,000/8)*3 45,000
Cash 54,000 Premium 45,000

2019
Premiums expense 75,000 2019 BALANCE SHEET
Est.Premium Liability 75,000 Premiums P9,000 or 3000 units
Est Premium Laibility P30,000
Specific Liabilities
• Premiums
Univ Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers
receive a leash. The leashes cost Univ P3.00 each. Univ estimates that 40 percent of the coupons will be
redeemed. Data for 2019 and 2020 are as follows:
2019 2020
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000 =40,000 units
Coupons redeemed 120,000 150,000 =(270,000/8) 33,750

2020 2020
Premiums (Leash) 66,000 Est.Premium Liability (150,000/8)*3 56,250
Cash 66,000 Premium 56,200

2020
Premiums expense 90,000 2020 BALANCE SHEET
Est.Premium Liability 90,000 Premiums P18,750 or 6,250 units
Est Premium Laibility P63,750
Specific Liabilities
• Premiums

Univ Co. includes one coupon in each bag of dog food it sells. In return for eight coupons,
customers receive a leash. The leashes cost Univ P3.00 each. Univ estimates that 40
percent of the coupons will be redeemed. Data for 2019 and 2020 are as follows:
2019 2020
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

The premium liability for 2019/2020 is _______

 Specific Liabilities
• Premiums
Univ Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers
receive a leash. The leashes cost Univ P3.00 each. Univ estimates that 40 percent of the coupons will be
redeemed. Data for 2019 and 2020 are as follows:
2019 2020
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

2019
Number of coupons issued 500,000
Etimated coupons to be redeemed (40%) 200,000
Coupons redeemed 120,000
Estimated remaining coupons to be redeemed 80,000
Estimated remaining leash to be redeemed (8:1) 10,000

Estimated Premium Liability P30,000

 Specific Liabilities
• Premiums
Univ Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers
receive a leash. The leashes cost Univ P3.00 each. Univ estimates that 40 percent of the coupons will be
redeemed. Data for 2019 and 2020 are as follows:
2019 2020
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000
Beg Bal 2020 TOTAL
Number of coupons issued 600,000
Etimated coupons to be redeemed (40%) 80,000 (from 2019) 240,000 320,000

Coupons redeemed 150,000

Estimated remaining coupons to be redeemed 170,000
Estimated remaining leash to be redeemed (8:1) 21,250

Estimated Premium Liability P63,750

Specific Liabilities
• Premiums

Univ Co. includes one coupon in each bag of dog food it sells. In return for eight coupons,
customers receive a leash. The leashes cost Univ P3.00 each. Univ estimates that 40
percent of the coupons will be redeemed. Data for 2019 and 2020 are as follows:
2019 2020
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

The premium (asset) for 2019/2020 is _______

 Specific Liabilities
• Premiums
Univ Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers
receive a leash. The leashes cost Univ P3.00 each. Univ estimates that 40 percent of the coupons will be
redeemed. Data for 2019 and 2020 are as follows:
2019 2020
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

2019
Number of coupons issued 500,000
Etimated coupons to be redeemed (40%) 200,000
Coupons redeemed 120,000
Leash redeemed (8:1) 15,000
Leash Purchased 18,000

Premium (asset) at P3 Php 9,000 or 3,000 units

leash
 Specific Liabilities
• Premiums
Univ Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers
receive a leash. The leashes cost Univ P3.00 each. Univ estimates that 40 percent of the coupons will be
redeemed. Data for 2019 and 2020 are as follows:
2019 2020
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

2019
Coupons redeemed 150,000
Leash redeemed (8:1) 18,750
Leash Purchased 22,000
Beg Balance of Leash 3,000
Total Available Leash 25,000
Premium (asset) at P3 Php 18, 750 or 6,250
leash
Specific Liabilities

• Univ Music Shop gives its customers coupons redeemable for a poster plus a
BTS CD. One coupon is issued for each peso of sales. On the surrender of
100 coupons and P5.00 cash, the poster and CD are given to the customer.
It is estimated that 80% of the coupons will be presented for redemption.

• Sales for the first period were P1,050,000, and the coupons redeemed
totaled 510,000. Sales for the second period were P1,260,000, and the
coupons redeemed totaled 1,275,000. Univ Music Shop bought 30,000
posters at P2.00/poster and 30,000 CDs at P6.00/CD.
Specific Liabilities
2019 2020
Sales/Number of coupons issued 1,050,000 1,260,000

Etimated coupons to be 840,000 1,008,000

redeemed (80%)
Espected number of cd + poster 8,400 10,080
to be redeemed (100:1) + Php
5.0
Premium Expense (Php 6 +Php Php25,200 Php 30,240
2- Php 5)=Php 3 (cd+poster)

One coupon is issued for each dollar of sales. On the surrender of 100 coupons and P5.00 cash,
the poster and CD are given to the customer. It is estimated that 80% of the coupons will be
presented for redemption.

Univ Music Shop bought 30,000 posters at P2.00/poster and 30,000 CDs at P6.00/CD.
Specific Liabilities

2019 2019
Premiums (CD+P) 240,000 Est.Premium Liability (510,000/100)*3 15,300
Cash 240,000 Cash (510,000/100)*5 25,500
Premium(510,000/100)*8 40,800
2019
Premium expense 25,200
Est.Premium Liability 25,200
2019 BALANCE SHEET
Premiums P199,200 or 24,900 units
(30,000-5,100)
Est Premium Laibility P9,900
Specific Liabilities

2020 2020
Premium expense 30,240 Est.Premium Liability (1,275,000/100)*3 38,250
Est.Premium Liability 30,240 Cash (1,275,000/100)*5 63,750
Premium(1,275,000/100)*8 102,000

2020 BALANCE SHEET

Premiums P97,200 or 12,150 units
(24,900-12,750)
Est Premium Laibility P1,890
Specific Liabilities
2019
Sales/Number of coupons issued 1,050,000

Etimated coupons to be redeemed (80%) 840,000

Coupons redeemed 510,000
Estimated remaining coupons to be 330,000
redeemed next period
Espected remaining number of cd + poster 3,300
to be redeemed (100:1)
Premium Liability (Php 2 + Php 6 -Php 5) Php 9,900

Sales for the first period were P1,050,000, and the coupons redeemed totaled 510,000. Sales for
the second period were P1,260,000, and the coupons redeemed totaled 1,275,000.
Specific Liabilities
2019 2020 TOTAL
Sales/Number of coupons issued 1,260,000 1
Etimated coupons to be redeemed (80%) 1,008,000 1,008,000
Estimated remaining coupons to be redeemed 330,000 330,000
Prev period
Coupons redeemed 1,275,0000

Estimated remaining coupons to be redeemed 63,000

next period
Espected remaining number of cd + poster to be 630
redeemed (100:1)
Premium Liability (Php 2 + Php 6 -Php 5) Php 1,890

Sales for the first period were P1,050,000, and the coupons redeemed totaled 510,000. Sales for
the second period were P1,260,000, and the coupons redeemed totaled 1,275,000.
Specific Liabilities
• Warranty
-typially offered in the sale of appliances wherein guarantee to previde free repair service or
replacement, for a specified period of time, if the product sold is defective

-at the point of sale,a liability is incurred

-accrual approach or expense as incurred approach

Specific Liabilities

Univ Company sells washing machines that carry a three

year warranty against manufacturer’s defects. Based on
company experience, warranty costs are estimated at P300
per machine. During 2020 Univ sold 2,400 washing
machines and paid warranty costs of P170,000. In its
income statement for the year ended December 31, 2020,
Univ should report warranty expense of_____
Univ shoud report warranty liability of ______
Specific Liabilities

Univ Companny owns a car dealership that it uses for

servicing cars under warranty. The entity’s experience with
warranty calims is that 60% of all cars sold in a year have
zero defect, 25% have normal defecct and 15% have
significant defect. The cost of rectifying a normal defect in a
is P10,000, while a significant defect in a car is rectifd at a
cost of P30,000. The entity sold 500 cars during the year.
What is the expected provision for warranty at the end of
the year.
Specific Liabilities

Univ Company gives warranties at the time of sale to

purchasers of its product. Under the terms of the sale, the
entity undertakes to make good, by repair or replacement,
manufacturing defects thatbecome apparent within one
eyar from the date of sale.
Specific Liabilities

In 2020 Univ introduced a new television model with a two

year warranty against defects. It is estimated that warranty
cost equal to 2% of sales is incurred within 12 months
following the sale and 4% of sales in the second 12 months
following the sale.
Specific Liabilities

Sales and actual warranty expense for 2020 are

P3,000,000 and P450,000, respectively. In 2021, sales and
actual warranty expense are P5,000,000 and P150,000.

How much is the warranty expense in 2020/2021?

How much is the warranty liability in 2020/2021?
Specific Liabilities
Bonus

Norris Co. has a contract with its president to pay her a 5% bonus for 2020 and 2021. The
income tax rate is 30% during these two years.

In 2020, income before deductions for the bonus and federal income taxes was P400,000. If
the bonus is based on income before deduction of the bonus but after deduction of income tax,
the bonus is
Specific Liabilities
Bonus

Norris Co. has a contract with its president to pay her a 5% bonus for 2020 and 2021. The
income tax rate is 30% during these two years.

In 2021, income before deductions for the bonus and income taxes was P600,000. If the bonus
is based on income after deductions for the bonus and income tax, the bonus is
Specific Liabilities
Bonus

Univ Co. has an agreement with the sales manager that she is to receive a
bonus of 5% of net income after deduction of the bonus and income taxes.
Company income before deduction of the bonus and income taxes is P250,000.
Income taxes are 30% and the bonus is deductible for taxes. Show your
calculation of the amount of the bonus.
Specific Liabilities
Unearned Revenue

Univ Co. sells major household appliance service contracts for cash. The service contracts are for a one-
year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service
contract revenues. This account had a balance of P840,000 at December 31, 2019 before year-end
adjustment. Service contract costs are charged as incurred to the service contract expense account, which
had a balance of P210,000 at December 31, 2019. Outstanding service contracts at December 31, 2019
expire as follows:
• During 2020 During 2021 During 2021
• P175,000 P280,000 P126,000

• What amount should be reported as unearned service contract revenues in Univ's December 31, 2019
balance sheet?
END